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United States General Accounting Office:
GAO:
Testimony:
Before Congressional Committees:
For Release on Delivery:
Expected at 10:00 a.m.
Tuesday, May 14, 2002:
Tax Administration:
Continued Progress Modernizing IRS Depends on Managing Risks:
Statement of James R. White, Director, Tax Issues:
Randolph C. Hite, Director, Information Technology Architecture and
Systems Issues:
Steven J. Sebastian Acting Director, Financial Management Issues:
GAO-02-715T:
Mr. Chairman and Members of the Committees:
We are pleased to be here today as we approach the fourth anniversary
of the Internal Revenue Service (IRS) Restructuring and Reform Act of
1998, which established Congress' expectation that IRS modernize to
better meet taxpayer needs. As you requested, our statement gives an
overview of IRS's current performance and resources and then assesses
the progress that IRS has made modernizing and the risks to continued
progress. Our overview and the rest of our statement are based
primarily on issued reports or ongoing work for the committees holding
this hearing.
Overall, since the mid-1990s IRS has seen increased workload,
decreased staffing, and significant changes in the allocation of
resources between taxpayer assistance programs and its compliance and
collection programs. Any overview of a large agency must condense and
summarize a great deal of information. We selected data, presented in
seven figures in the appendix to this statement, to illustrate some of
the key trends at IRS since the mid-1990s. As our figures show:
* Between 1995 and the end of 2001 IRS's workload, measured by returns
filed, increased by about 10 percent while aggregate staffing declined
by about 14 percent. (See figure 1.)
* Over the same time, there was a significant internal reallocation of
resources with a disproportionate decline in compliance and collection
program staffing to accommodate more emphasis on taxpayer service,
such as telephone assistance, and to information systems operation and
investment. (See figure 2 in comparison with figure 1.)
* Electronic filing of returns increased but not enough to reduce
paper returns sufficiently to free significant processing resources
for use elsewhere. (See figure 3.)
* The reallocation of resources shows signs of beginning to produce
more accurate service for taxpayers, but the compliance and collection
programs have seen large and pervasive declines in performance
indicators such as audit rates, collection cases closed, enforcement
actions such as liens and levies, and raw productivity (measured by
cases closed per unit of staff time without adjusting for possible
quality changes). (See figures 4, 5, 6 and 7.)
Mr. Chairman, IRS is at a critical juncture. Commissioner Rossotti,
who has led IRS's modernization efforts for the past 4-112 years, has
said that he will be stepping down in November. That will be about
half way through the 10 years that he estimated would be needed to
modernize IRS. During his tenure, IRS has made important progress at
laying the management foundation for a more modern agency able to
respond to taxpayer needs faster, more accurately, and at lower cost.
However, at this time, the foundation is not complete and neither is
the structure to be built on the foundation - the reengineered
processes that would deliver better service to taxpayers. To continue
modernizing, IRS must successfully manage some significant risks that
threaten progress. Areas of risk include IRS's compliance and
collection programs that have seen large declines, systems
modernization where several large systems are moving into deployment
and performance management where new measures and systems are being
implemented.
The following summarizes our main points regarding the progress IRS
has made and the risks that need to be managed.
* Some of the most important steps that IRS has taken to lay the
foundation for ultimately providing better service to taxpayers and
ensuring compliance with the tax laws are in the areas of organization
and management of performance, systems acquisition and development,
and financial management.
- After much planning, in October 2000, IRS transitioned to a new
organizational structure with four operating divisions focused on
different types of taxpayers.
- About the same time, IRS implemented a new strategic planning,
budgeting, and performance management process, designed to reconcile
competing priorities with the realities of available resources. Using
that process, IRS has determined that almost 2,300 staff positions
could be redirected toward higher-priority needs. In addition, IRS now
has an evaluation system for front line employees that is aligned with
the mission and goals of the agency and is developing a sorely needed
measure of voluntary compliance.
- With respect to systems modernization, IRS has made important
progress in establishing the systems infrastructure, delivering two
systems applications, and establishing the controls and capabilities
needed to effectively acquire and deploy modernized systems.
- Finally, with respect to financial management, IRS has for 2
consecutive years prepared financial statements that received
unqualified opinions.
Many of these steps increase IRS's management capacity. Some are
beginning to deliver better service to taxpayers or more efficient use
of resources.
* To realize the promise of modernization to deliver better service to
taxpayers while ensuring compliance with the tax laws, IRS must finish
building a strong management foundation and must use this foundation
to make the substantive business practice changes that could improve
its efficiency and service to taxpayers. There are risks in several
areas that threaten continued progress.
- One area of risk is IRS's compliance and collection programs that
have declined, sometimes dramatically, since 1996. Many view these
programs, such as audits to determine whether taxpayers have
accurately reported the amount of taxes they owe and collection
followup with taxpayers who have not paid what is owed, as critical
for maintaining the public's confidence in our tax system. The
commissioner has emphasized the need to reverse the trends in these
programs.
- Another area of risk is systems acquisition and deployment. Since
1999, Congress has provided almost $1 billion for investment in IRS's
business systems. Despite the important progress in building
management capacity, IRS is not where it committed to be in acquiring
infrastructure and business application systems and is not where it
needs to be in implementing management controls and capabilities. This
increases the risk of not delivering promised systems capabilities on
time and within budget. As IRS moves forward, this risk is amplified
because system interdependencies and complexity increase dramatically
during the later phases of system projects.
- Certain aspects of performance management are another risk area. IRS
needs to ensure that it has comparable performance measures over time
and sufficient data to assess performance. IRS needs to routinely do
better evaluations of its programs to determine the factors that
affect performance and identify ways to improve.
- A final risk area is financial management. Although it received an
unqualified audit opinion, IRS has had to assign staff to manually
analyze and correct the data generated by its financial systems. This
approach, which takes months to complete, does not produces timely
information for managing the agency.
Improved Foundation for Tax Administration:
The following highlights some of the most important steps that IRS has
taken to lay the foundation for ultimately providing better service to
taxpayers and ensuring compliance with the tax laws.
New Organizational Structure:
First, during fiscal year 2001, IRS transitioned to a new
organizational structure with four divisions having responsibility for
administering tax law for a set of taxpayers with similar needs. By
reorganizing in this manner, IRS sought to establish clearer lines of
responsibility and accountability for improving service to taxpayers
and resolving their problems. Through such improvements, IRS expected
to better enable taxpayers to comply with the tax laws.
Because many major reengineering efforts were to be led by the new
divisions, it is too early to judge the impact that the reorganization
has had in improving service. The widescale reorganization was
accomplished with no serious disruption of recent filing seasons. The
filing season for most individual taxpayers extends from January 1st
to April 15th. It is during that time when most taxpayers file their
returns, call IRS with questions, and make other contacts with IRS
related to filing. To its credit, IRS was able to reorganize while
managing the challenges associated with the sheer scope of filing
season activities, including the year 2000 transition.
New Budgeting and Planning System:
To make decisions for fiscal year 2002 and subsequent year operations,
IRS implemented a new strategic planning, budgeting, and performance
management process during fiscal year 2000. The process begins, as
outlined in figure 1, with the operating divisions preparing strategic
assessments that describe significant trends, issues, and problems and
identifies proposals for dealing with them. After receipt and review
of the strategic assessments, the commissioner provides detailed
guidance (step 2) to the operating divisions for developing their
strategy and program plans (step 3). These plans are then incorporated
(step 4) into an IRS-wide performance plan (which sets out measurable
objectives such as the number of audits to be done). These plans are,
in turn, incorporated into IRS's budget justification (which sets out
its resource requests to Congress). The remaining steps (5 and 6)
involve allocating resources across IRS divisions and programs and
monitoring division adherence to the planning and budgeting decisions.
Figure 1: IRS's Strategic Planning Process:
[Refer to PDF for image: illustration]
Step 1: Strategic Assessment.
Step 2: Commissioner's Planning Guidance.
Step 3: Strategy and Program Plan.
Step 4: Performance Plan and Budget Justification.
Step 5: Business Resource Allocation Plan.
Step 6: Execute and Review Strategy, Programs, and Budgets.
Source: GAO's review of IRS's planning documentation.
[End of figure]
This process provides IRS senior management with a means to reconcile
competing priorities with the realities of available resources.
Through the use of this process in developing its budget request for
fiscal year 2003, IRS identified a myriad of expected efficiency
improvements, technological enhancements, labor-saving initiatives,
and workload decreases that it projects will enable it to redirect
about $158 million (about 2,300 staff positions) to higher-priority
areas. This accounted for two out of every three additional staff that
IRS believed was needed.
New Employee Evaluation System In February 2000, IRS implemented a
new evaluation system for its managers and in October 2001 implemented
a new evaluation system for front-line employees. These systems were
developed to structurally align performance expectations for managers
and employees with IRS's strategic goals. An employee evaluation
system can be a powerful tool in helping an agency achieve its mission
and ensuring employees at every level of the organization are working
toward common ends. Evaluation systems should help employees
understand their responsibilities and how their day-to-day work
contributes toward meeting their agency's strategic goals as well as
providing a mechanism for giving employees candid, specific feedback
on how well they are meeting their rater's expectations. For agencies
like the IRS that are undergoing a cultural change, the employee
evaluation system helps reinforce behaviors and actions that support
the agency's mission. IRS recognizes that it may take a while before
the new evaluation systems achieves the intended results of balancing
taxpayer needs while at the same time enforcing the tax laws. These
expectations may appear to conflict so managers and employees may need
time to better understand what the new performance expectations mean
in terms of their daily work and which behaviors they should change in
order to put IRS's new operational environment into practice.
Progress in Measuring Voluntary Compliance:
IRS has made progress in developing a way to measure the voluntary
compliance of individual taxpayers without placing an undue burden on
them. Each year billions of dollars in taxes are not voluntarily
reported and paid. To understand the overall extent of noncompliance,
IRS plans to implement its study of tax reporting compliance later
this fall The study should provide IRS with data to update the
criteria it uses to select tax returns for audit and thereby reduce
the number of compliant taxpayers selected. Also, the study is
intended to provide detailed information about compliance, such as why
taxpayers fail to comply with a specific tax law provision. Having
such information should enable IRS to make operational changes such as
modifying tax forms and instructions or to recommend tax law changes
that could improve compliance.
Business Systems Modernization:
Over the past 3-plus years, IRS has made important progress in
establishing the infrastructure systems that are to provide the
platforms upon which future business applications will run.
Establishing this infrastructure is a necessary prerequisite to
introducing the business applications that are in turn intended to
provide benefits to taxpayers and IRS. During this time, IRS has also
made important progress in delivering two system applications—Customer
Communications 2001 and Customer Relationship Management Exam—that are
producing benefits as of today. For example, Customer Communications
2001, which is software improvements to IRS's customer service
telephone system, was implemented last summer and is now routing
taxpayer calls with common questions to automated menu driven
information services, thereby freeing IRS customer service
representatives to answer complex or less common inquiries.
IRS has also made progress in building and readying for deployment,
business applications to, among other things, replace existing
antiquated information technology systems that have hampered IRS's
ability to improve customer service to taxpayers. In particular, IRS
has been building and is planning to pilot in July 2002, the first
release of its Customer Account Data Engine (CADE)—a modern relational
database designed to replace IRS's tape-based data management system—
for taxpayers with simple tax returns. IRS plans to implement this
release in January 2003 in time for the 2003 filing season and plans
to implement four additional CADE releases, each for progressively
more complex tax returns, over the next 4 years with the goal of
having CADE fully implemented by 2006.
In addition, IRS has made progress in addressing our recommendations
to establish the modernization management controls needed to
effectively acquire and implement major systems. For example, we have
consistently recommended since 1995 that IRS develop and implement an
enterprise architecture (modernization blueprint) to guide and
constrain the acquisition of business systems modernization (BSM)
systems; IRS recently issued an updated a version of its Enterprise
Architecture for how it wants to transition its business systems
environment, thus giving a high-level roadmap to manage and control
business and technological change.
The nature of IRS's progress thus far should not be viewed solely in
the context of what taxpayer service and IRS efficiency benefits are
being realized today. Rather, this progress should also be viewed in
terms of laying the necessary foundation from which the benefits of
future applications can be realized. As a matter of fact, at this
point in time, the level of tangible mission-related benefits that
have been realized from modernization investments are not yet
commensurate with costs incurred. In our view, this is not
unreasonable because as depicted in figure 2, the expected return on
these and future investments are to materialize later when new
business applications are brought on line.
Figure 2: Notional BSM Benefits Versus Costs:
[Refer to PDF for image: line graph]
The graph plots Cost and Benefit Amounts versus Time. The graph
depicts cost and benefits on separate lines, and indicated the current
IRS position in relation to those lines.
Source: GAO.
[End of figure]
Financial Reporting:
For 2 consecutive years, IRS has produced financial statements that
present fairly, in all material respects, in conformity with U.S.
generally accepted accounting principles, IRS's assets, liabilities,
net position, changes in net position, budgetary resources,
reconciliation of net costs to budgetary obligations, and custodial
account activity. This unqualified opinion was achieved through the
extraordinary efforts of IRS's senior management and staff to
compensate for serious internal control and system deficiencies
discussed in the risk section of this statement. Additionally, IRS
continues to make progress on several significant internal control and
compliance issues that contribute to its difficulties in producing
reliable and timely information.
IRS is here
Risks to Continued Modernization Progress:
IRS faces risks in several areas that if not successfully managed
could threaten the agency's ability to continue making progress
modernizing.
Compliance and Collection Declines:
The first area of risk involves the declines in compliance and
collection programs. Taxpayers' willingness to voluntarily comply with
the tax laws depends in part on their confidence that their friends,
neighbors, and business competitors are paying their share of taxes.
To help provide that assurance, IRS operates six major compliance
programs. These programs (1) check for math errors and unpaid balances
during returns processing, (2) determine taxes due from apparent
nonfilers detected through computer matching, (3) determine taxes due
from apparent underreporters detected through computer matching, (4)
audit tax returns filed by individuals, (5) audit tax returns filed by
corporations, and (6) audit other tax returns such as estate and gift
returns.
IRS also operates two separate collection programs for dealing with
taxpayers who are delinquent in paying the taxes they owe. These
programs pursue collection through (1) telephone contacts with the
taxpayers and (2) personal visits with the taxpayers by IRS field
staff.
As part of our ongoing work for the House Ways and Means Subcommittee
on Oversight, we identified large and pervasive declines across the
compliance and collection programs, except for returns processing,
between fiscal years 1996 and 2001. For example, individual and
corporate audit productivity as measured by cases closed per unit of
staff time declined 31 and 47 percent, respectively, while field and
telephone collection productivity declined over 20 percent. These
productivity declines coupled with reduced staffing has translated to
declines in coverage. That is, the proportion of individual and
corporate tax returns that were audited declined 63 and 60 percent,
respectively, and the percentage of delinquencies closed by telephone
and field collection declined by 15 and 45 percent, respectively.
Figures 2, 5 and 6 in the appendix provide additional data.
The decline in collection coverage reflected the collection programs'
inability to work a growing proportion of the delinquent cases
referred from the compliance programs. In response, by fiscal year
2001, IRS was deferring collection action on about one out of three
assigned delinquencies. By the end of fiscal year 2001, we estimate
that IRS had deferred collecting taxes from about 1.3 million
taxpayers[Footnote 1] who owed about $16.1 billion.[Footnote 2] Absent
significant operational change, IRS officials said that they had
little expectation of reopening many deferred collection cases.
The declines in IRS's compliance and collection programs affected
taxpayers in several ways.
* The likelihood that taxpayer noncompliance would be detected and
pursued by IRS declined. For example, coverage in the nonfiler program
declined by 69 percent by the end of fiscal year 2001.
* The length of time that taxpayers owed back taxes at the time they
were assigned to collection increased between 1996 and 2001 although
IRS intended that by deferring collection action on some older
collection cases it could get to newly assigned cases quicker.
* The amount of penalties and interest continued to accumulate on
deferred collection cases, making future payment increasingly
demanding if subsequently pursued by IRS.
* The likelihood that delinquent taxpayers would experience enforced
collection such as through levies placed on their wages or bank
accounts declined about 64 percent from 1996 to 2001, although there
has been some upturn from 2000 to 2001 (see figure 6 in the appendix).
Taken together, changes such as these have reduced the incentives for
voluntary compliance. Also, some available, but very limited, data
suggest that voluntary compliance may have begun to deteriorate. For
example, the number of apparent individual nonfilers increased about
three and one-half times faster than the individual tax filing
population.
IRS managers are concerned about the decline in compliance and
collection programs and the extent that this threatens voluntary
compliance. A significant decline in voluntary compliance would
undermine IRS's modernization effort.
Since the start of IRS' modernization program in late 1999, the
program has received almost $1 billion and expects to need about
another $2.5 billion over the next 5 years. In fiscal year 2002, this
funding supports 20 ongoing system acquisition projects, currently at
different life-cycle stages along with initiatives to develop the
capabilities for managing the acquisition projects.
Despite the important progress discussed above, IRS is not where it
committed to be in acquiring both infrastructure and application
systems and not where it needs to be in implementing modernization
management controls. This is because IRS's first priority and emphasis
has been to get the newer, more modern systems-—with their anticipated
benefits to taxpayers-—up and running. In so doing, however, the
establishment of management capacity to ensure that these systems are
introduced successfully has not been given equal attention and thus
has not kept up. Simply stated, proceeding without these controls
increases the risk of not delivering promised system capabilities on
time and within budget. Moreover, these risks are amplified as IRS
moves forward because interdependencies among current ongoing projects
and the complexity of associated work activities to be performed, have
and will continue to increase dramatically as more system projects
move into the latter stages of their life cycles and are deployed.
More recently, IRS has acknowledged this risk and initiated efforts to
better balance controls with project pace and workload.
Testimony before you last spring outlined the same general concern
that we are stating today.[Footnote 3] At that time, we feared that
systems workload and pace were getting too far ahead of the agency's
ability to deal with them effectively, i.e., having proper management
controls and capacity in place. Since then, IRS has continued to move
forward with its ongoing infrastructure and business application
projects while simultaneously taking steps to implement missing
management controls and capabilities. During this time, however, the
imbalance in project workload and needed management capacity has
remained a concern. More recently, our report of this past February
[Footnote 4] recommended that the commissioner of internal revenue
reconsider the scope and pace of the program to better strike a
balance with the agency's capacity to handle the workload. The
commissioner agreed, promising action in these areas. In particular,
the commissioner agreed to align the pace of the program with the
maturity of IRS' controls and management capacity. The commissioner
also made correcting remaining management controls weaknesses a
priority. Figure 3 illustrates IRS's approach to developing projects
and controls and the degree to which projects have gotten ahead of
controls.
Figure 3: Concurrent Development of Program-Level Controls and
Projects:
[Refer to PDF for image: project timeline]
IRS current position is established at 5/02.
Program Management Capability: Program Management Office;
Timeline: Prior to 1/01 through 1/02;
Management capability fully established: 1/02.
Program Management Capability: Selected Management Capabilities (e.g.
Configuration Mgmt, Quality Assurance, Risk Mgmt);
Timeline: Prior to 1/01 through 1/03 and beyond;
Management capability fully established: 12/01; 5/02; 6/02.
Program Management Capability: Enterprise Architecture;
Timeline: Prior to 1/01 through 4/02;
Management capability fully established: 1/01 (1.0); 6/01 (1.1); 4/02
(2.0).
Selected Key Projects: STIR;
Timeline: Prior to 1/01 through 1/03 and beyond;
Milestone 3 - beginning of detailed design and development: 2/01;
Milestone 4 - completion of detailed design and development/beginning
of deployment: 3/02.
Selected Key Projects: IRFoF (Release 1);
Timeline: Prior to 1/01 through 1/03 and beyond;
Milestone 3 - beginning of detailed design and development: 9/01;
Milestone 4 - completion of detailed design and development/beginning
of deployment: 5/02.
Selected Key Projects: CADE (Releases 1, 2);
Timeline: Prior to 1/01 through 1/03 and beyond;
Milestone 3 - beginning of detailed design and development: 6/01;
Milestone 4 - completion of detailed design and development/beginning
of deployment: 1/03.
Selected Key Projects: e-Services;
Timeline: Prior to 1/01 through 1/03 and beyond;
Milestone 3 - beginning of detailed design and development: 1/01;
Milestone 4 - completion of detailed design and development/beginning
of deployment: 11/02.
Selected Key Projects: Other projects (15);
Timeline: Prior to 1/01 through 1/03 and beyond.
Source: GAO.
[End of figure]
We nevertheless remain concerned because projects are entering
critical stages and not all essential management controls are in place
and functioning. In particular, in our ongoing work for the
appropriations subcommittees, we found that IRS is proceeding with
building and deploying systems before it has (1) fully implemented
mature software acquisition management processes, (2) developed and
deployed a human capital management strategy, and (3) established
effective cost and schedule estimating practices.
Weaknesses in any one of these modernization management controls
introduces an unnecessary element of risk to the BSM program, but the
combination of these weaknesses introduces a level of risk that
increases exponentially over time. IRS has reported that BSM projects
have already encountered cost, schedule, and/or performance
shortfalls. Our analysis has showed that weak management controls
contributed directly to these problems, or were the basis for prudent,
proactive IRS decisionmaking not to start or continue projects.
Given that IRS' fiscal year 2002 BSM spending plan supports progress
towards the later phases of key projects and continued development of
other projects, it is likely that BSM projects will encounter
additional cost, schedule, and performance shortfalls. Figure 4
depicts this combination of circumstances.
Figure 4: Current Time Line Depicting Escalating Program Execution
Risk:
[Refer to PDF for image: illustration]
This illustration consists of Figure 2 with an arrow overlaid to
indicate rising execution risk as time goes on.
Source: GAO.
[End of figure]
IRS acknowledges these risks and is committed to addressing them. For
example, we recommended to IRS that it make implementing missing
controls a management priority[Footnote 5] and as we recently
reported,[Footnote 6] the commissioner in 2001 hired an executive-—
with extensive private-sector experience—-to lead the BSM program
office and this official has developed plans to address each missing
control, assigned responsibilities and milestones for their
completion, and is managing IRS's progress in executing the plans.
These plans address all of our outstanding major recommendations on
human capital management, software acquisition, information technology
risk management, and enterprise architecture compliance.
Timing is critical. While the lack of controls can be risky in
projects' early stages, it is essential that such controls be in place
when projects enter detailed system design, development, and
implementation. To mitigate this added risk, IRS needs to fully
implement the remaining management controls that we have recommended.
Performance Management Risks:
As noted, IRS has made progress in revamping its performance
management system. However, several aspects of the system put IRS's
ability to effectively measure, assess, and improve organizational and
employee performance at risk.
First, IRS needs to ensure that it has comparable performance measures
and sufficient data to assess performance. As part of its agencywide
efforts to develop balanced performance measures, IRS continues to
revise some measures and develop new ones to judge its performance.
Although we recognize the need to improve measures, changes interrupt
the possibility to establish trends and compare performance between
periods. In past years,[Footnote 7] our assessment of IRS's filing
season performance included comparisons of various performance
measures against IRS's goals and prior years' performance. We have
been unable to make such a comparison for some measures[Footnote 8]
because IRS (1) revised some measures that it had been using to assess
performance and established some new measures and (2) had not
established targets for new or revised measures. For example, during
the 2001 filing season, IRS made numerous changes, such as renaming
measures and revising formulas, to its measures for processing paper
returns, refunds, and remittances. Specifically, of 12 measures,
[Footnote 9] 5 were new, 3 were revised, and 1 did not have a set
target.
Similarly, of the 15 telephone measures in place,[Footnote 10] 7 were
either new or revised and 4 did not have targets set. Measures of
telephone accuracy are examples of how new and revised measures make
it difficult to assess IRS's performance in providing quality
telephone assistance over time. Also, figure 4 of the appendix shows
that because of changes made to its telephone measures, IRS does not
have sufficient time-series data for each of its four measures of
telephone accuracy to make a thorough assessment of how well IRS is
meeting its goal of providing "world class" telephone service.
As a result, managers, Congress and other stakeholders may have
difficulty using information from new or revised measures. Although
some IRS managers may be aware of these changes to measures, we found
little or no documentation that disclosed the changes for outside
stakeholders. All in all, IRS officials agreed with our assessment
that it is difficult to put the reported results into context because
of the absence of performance goals and trend data However, while the
officials understood the importance of such information, they also
said they rely heavily on other information, such as workload
indicators and other management information, that they have used for
years to identify and correct problems that could affect activities
and help judge IRS's overall success.
In addition to having comparable measures to gauge performance, IRS
needs to do more and better evaluations of its business practices so
that it can determine the factors that affect program performance and
identify ways to more effectively use resources and improve service.
Over the past year, we have reported on several of IRS's efforts to
improve the efficiency of its programs that were hindered by
insufficient program evaluation efforts. These programs dealt with the
Offer in Compromise Program, telephone assistance accessibility and
accuracy, and employment tax compliance.
* In our report on IRS's Offer in Compromise Program, which allows
taxpayers to settle their tax liability for less than the full amount,
[Footnote 11] we pointed out that IRS lacked program evaluation plans
for various initiatives it undertook to try to reduce the offer
inventory and processing time. In addition, IRS lacked performance and
cost data needed to monitor program performance and had not set goals
for offer processing time that were based on taxpayer needs, other
benefits, and costs.
* Our report on IRS's telephone assistance[Footnote 12] showed that
IRS missed some opportunities to analyze data to better understand the
factors affecting telephone performance, including the actions it took
to improve performance. IRS collected and analyzed a variety of data
about the key factors affecting telephone access and accuracy.
However, IRS officials sometimes reached conclusions about these key
factors without conducting analyses to test their conclusions.
* In our report on IRS's efforts to improve the compliance of small
businesses with requirements that they report and pay employment
taxes,[Footnote 13] we noted that IRS had developed several new
programs designed to prevent or reduce employment tax delinquencies by
speeding up or enhancing the notification to certain groups of
businesses. However, IRS had not successfully followed through on its
plans to evaluate new early intervention programs.
In responding to our recommendations on these programs, IRS recognized
the necessity and importance of evaluating program performance and
agreed with our recommendations on ways to better assess and measure
program results.
As IRS moves forward with modernization, the capacity to conduct sound
performance evaluations on its current and planned operations will be
one building block for success. The Government Performance and Results
Act (GPRA) of 1993, IRS's guidance, and our prior work all stress the
need for analyses of program performance to determine the factors
affecting performance and to identify opportunities for improvement.
[Footnote 14] We recognize that some analysis can be costly, and thus,
the costs need to be balanced against the benefits. Considering that
IRS devotes considerable resources to many of its programs, the
benefits of analysis-—identifying ways to more effectively use
resources and improve service-—could be substantial.
Another performance management risk deals with IRS's ability to link
its budget requests with program results. GPRA requires agencies to
establish linkages between resources and results so that the Congress
and the American public can gain a better understanding of what is
being achieved in relation to what is being spent. As we recently
reported,[Footnote 15] IRS has made progress in linking some of its
budget justification to performance goals, but in other instances the
budget justification lacked performance goals or contained
inconsistencies between the budget request and performance goals.
* IRS's congressional justification has several good links between the
resources being requested and IRS's performance goals. For example,
IRS's budget includes an increase of 213 full-time equivalents and
$14.1 million to improve its telephone level of service, and its
performance measures show an expected increase in toll-free telephone
level of service from 71.5 percent in fiscal year 2002 to 76.3 percent
in fiscal year 2003.
* In some instances, IRS's congressional justification contained no
performance goals against which the Congress can hold IRS accountable.
For example, the budget request includes increased resources for
systematic noncompliance problems identified by the commissioner of
Internal Revenue, such as for abusive corporate tax shelters and
failure to pay large accumulations of employment taxes, yet it is
unclear from IRS's budget justification how many resources IRS intends
to devote to each of these problems. And, for none of these areas does
the budget justification include performance measures and goals that
Congress can use to assess IRS's progress in addressing these major
compliance problems. In recent testimony, we suggested that the House
Ways and Means Subcommittee on Oversight ask IRS for more specifics on
its goals, performance measures and resource plans.
A major purpose of GPRA and IRS's strategic planning, budgeting, and
performance management system is to support better-informed decisions
on allocating scarce resources by focusing on the results likely to be
achieved and then supporting subsequent oversight and accountability
by establishing transparent measures to assess performance. IRS's new
planning process and the linkages in its budget justification between
some of its resource requests and expected results are commendable
steps to implement this management approach. Improved linkages in
IRS's budget justifications would better enable Congress to make
difficult resource allocation decisions and to hold IRS accountable
for achieving results with the resources it is provided.
Financial Management Risks:
Although for the second consecutive year, IRS was able to produce
financial statements covering its tax custodial and administrative
activities in fiscal years 2001 and 2000,[Footnote 16] that were
fairly stated in all material respects, this was only achieved because
of the commitment of significant staff resources, time, and the use of
compensating processes to overcome serious internal control and system
deficiencies.
The major control and system deficiencies that we identified during
our most recently completed financial audit included:
* An inadequate financial reporting process;
* Weaknesses in controls over unpaid assessments;
* Weaknesses in controls over the identification and collection of tax
revenues due the federal government and issuance of tax refunds;
* Inadequate controls over property and equipment;
* Weaknesses in controls over its budgetary activity; and;
* Weaknesses in computer security controls.
To overcome these problems, IRS relied on costly, time-consuming
processes; statistical projections; external contractors; substantial
adjustments; and monumental human efforts that extended nearly 4
months after the September 30, 2001, fiscal year-end. These costly
efforts produced tens of billions of dollars of adjustments and would
not have been necessary if IRS's systems and controls operated
effectively.
IRS's current method of producing financial statements is not a
workable long-term solution to meeting its financial reporting
responsibilities for two basic reasons. First, the extent of manual
review and changes to financial records is so substantial, and
requires so much commitment from both management and the employees who
do this time-pressure work, that it is questionable whether this
effort is sustainable year after year. Second, the time frames
acceptable for year-end financial reporting are being compressed. The
Office of Management and Budget has announced that, by 2004,
government agencies will be required to produce financial reports
within 6 weeks of year-end. The Treasury Department has established a
goal of meeting such a compressed schedule during 2002. Without
significant and systemic changes in how IRS processes transactions,
maintains its records, and reports its financial results to accompany
its extensive compensating processes, IRS's ability to meet this
accelerated reporting deadline while sustaining an unqualified opinion
on its financial statements is questionable.
Moreover, weaknesses in controls and systems deficiencies threaten
modernization efforts.
* First, qualified staff whose input is critical to developing a
modernized financial management system are the same individuals
responsible for implementing the compensating processes to generate
the annual financial statements. The tremendous time and effort it
takes to derive the financial statements may make it impractical for
these individuals to effectively devote the time needed to ensure the
new system meets ongoing reporting needs.
* Second, because of the extent of adjustments to prevent
misclassification of financial data, unverified data extracts are of
questionable utility to IRS management. For example, without timely
and reliable data on unpaid tax assessments IRS is unable to promptly
identify and focus collection efforts on accounts most likely to prove
collectible. Also, IRS has difficulties in relating taxpayer accounts
that may be jointly responsible for unpaid taxes so that the correct
liability of each taxpayer is readily discernable. This has
contributed to instances of both taxpayer burden and lost revenues to
the federal government.]
The challenge for IRS is to balance its short-term goals of improving
its compensating processes with its long-term needs of overhauling its
financial systems.
Concluding Observations:
IRS is part way through what is intended to be a major organizational
transformation. Real progress has been made laying the foundation for
a more modern agency. To avoid delays in realizing the promise of
modernization for improved service to taxpayers while ensuring
compliance with the tax laws, the new commissioner should be willing
to work within the existing general framework for modernization and be
willing to build on the foundation that has been laid. Progress will
also require successfully managing the risks outlined in our
statement.
Mr. Chairman, this concludes our statement. We would be pleased to
respond to any questions that you or other committee members may have.
[End of section]
Appendix: Overview of Trends in Tax Administration:
Overall, since the mid-1990s IRS has seen increased workload,
decreased staffing, and significant changes in the allocation of
resources between taxpayer assistance programs and its compliance and
collection programs. We selected data, presented in the following
seven figures, to illustrate some of the key trends at IRS since the
mid-1990s.
Figure 1: IRS Workload as Measured by Returns Filed Has Increased
While Total Staffing Has Decreased:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of fiscal year
1995 through fiscal year 2001:
* Total IRS staff (average positions): declining from a high of
approximately 115,000 to approximately 100,000;
* All tax returns (including individual, corporation, partnership,
employment, estate, and other): increasing from approximately 205
million to 225 million.
Source: GAO's analysis of IRS's data.
[End of figure]
Figure 2: Enforcement Staffing Has Declined Proportionately More Than
Total Staffing:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of fiscal year
1995 through fiscal year 2001:
* Number of Revenue agents: declining from approximately 16,000 to
approximately 13,000;
* Number of Revenue officers: declining from approximately 8,000 to
approximately 6,000;
* Number of Document matching staff (FY 2001 data not available):
declining from approximately 3,500 to approximately 1,500.
Source: GAO's analysis of IRS's data.
[End of figure]
Figure 3: Individual Electronic Returns More Than Tripled While Paper
Returns Decreased by About 15 Percent:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of fiscal year
1995 through fiscal year 2001:
* Paper returns: declining from approximately 105 million to
approximately 95 million;
* Electronic returns: increasing from approximately 10 million to 35
million.
Source: GAO's analysis of IRS's data.
[End of figure]
Figure 4: Telephone Accuracy Is Increasing:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of filing seasons
1999 through fiscal year 2002:
* Tax law quality rate: increased from approximately 73% to 75%;
* Account quality rate: increased from approximately 60% to 70%;
* Tax law correct response rate: increased from approximately 71% to
75%;
* Account correct response rate: steady at approximately 87%.
Note: IRS has two types of measures for assessing the accuracy of its
responses to taxpayer calls concerning (1) tax law issues and (2)
IRS's records on their accounts. The quality rate is the percentage of
calls in which assistors followed all IRS procedures for the call type
and provided correct answers. The correct response rate is the
percentage of calls in which assistors provided correct answers for
the call type, discounting procedural errors. IRS has comparable data
only for the years shown.
Source: GAO's analysis of IRS's data.
[End of figure]
Figure 5: Audit Rates Have Declined:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of fiscal year
1996 through fiscal year 2001:
Individual returns: declined from approximately 1.8% to 0.7%;
Corporate returns: declined from approximately 2.3% to 1.2%;
Partnership returns: declined from approximately 0.5% to 0.2%.
Source: GAO's analysis of IRS's data.
[End of figure]
Figure 6: Gap Between New Delinquency Cases and Delinquency Cases
Closed; Declines in the Use of Liens and Levies:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of fiscal year
1996 through fiscal year 2001:
New delinquency cases: declined from approximately 5,200 to 4,700;
Delinquency cases closed: declined from approximately 5,000 to 3,300;
Liens files: declined from approximately 3,100 to 700;
Levies issued: declined from approximately 800 to 400;
Source: GAO's analysis of IRS's data.
[End of figure]
Figure 7: Raw Productivity Declined for Six of Eight Compliance and
Collection Programs:
[Refer to PDF for image: multiple line graph]
The graph depicts the following for the time period of fiscal year
1996 through fiscal year 2001:
Returns processing:
Underreporter:
Nonfilers:
Individual audit:
Corporation audit:
Other audit:
Telephone collection:
Field collection:
Source: GAO analysis of IRS data.
[End of figure]
[End of section]
Footnotes:
[1] Estimate is from a random sample. The 95-percent confidence
interval is 1.25 million to 1.35 million taxpayers.
[2] Estimate is from a random sample. The 95-percent confidence
interval is $14.8 billion to $17.4 billion.
[3] U.S. General Accounting Office, IRS Modernization: Continued
Improvement in Management Capability Needed to Support Long-Term
Transformation, [hyperlink, http://www.gao.gov/products/GAO-01-700T]
(Washington, D.C.: May 8, 2001).
[4] U.S. General Accounting Office, Business Systems Modernization:
IRS Needs to Better Balance Management Capacity with Systems
Acquisition Workload, [hyperlink,
http://www.gao.gov/products/GAO-02-356] (Washington, D.C.: February
28, 2002).
[5] See, for example, U.S. General Accounting Office, Tax Systems
Modernization: Results of Review of IRS' Third Expenditure Plan,
[hyperlink, http://www.gao.gov/products/GAO-01-227] (Washington D.C.:
January 22, 2001).
[6] U.S. General Accounting Office: Business Systems Modernization:
Results of Review of IRS's March 2001 Expenditure Plan, [hyperlink,
http://www.gao.gov/products/GAO-01-716] (Washington D.C.: June 29,
2001), and [hyperlink, http://www.gao.gov/products/GAO-02-356].
[7] U.S. General Accounting Office, Tax Administration: Assessment of
IRS' 2000 Filing Season, [hyperlink,
http://www.gao.gov/products/GAO-01-158] (Washington, D.C.: Dec. 22,
2000).
[8] U.S. General Accounting Office, Tax Administration: Assessment of
IRS' 2001 Filing Season, [hyperlink,
http://www.gao.gov/products/GAO-02-144] (Washington, D.C.: Dec. 21,
2001).
[9] There were 12 measures listed in IRS's Strategy and Program Plan,
dated July 25, 2001 and October 29, 2001.
[10] There were 15 measures listed in the Strategy and Program Plan as
of July 25, 2001. As of October 29, 2001, one measure, "Toll-Free
Automated Completion Rate," was deleted.
[11] U.S. General Accounting Office, Tax Administration: IRS Should
Evaluate the Changes to its Offer in Compromise Program, [hyperlink,
http://www.gao.gov/products/GAO-02-311] (Washington, D.C.: Mar.15,
2002).
[12] U.S General Accounting Office, IRS Telephone Assistance: Limited
Progress and Missed Opportunities to Analyze Performance in the 2001
Filing Season, [hyperlink, http://www.gao.gov/products/GAO-02-212]
(Washington D.C.: Dec. 7, 2001).
[13] U.S. General Accounting Office, Tax Administration: IRS's Efforts
to Improve Compliance With Employment Tax Requirements Should Be
Evaluated, [hyperlink, http://www.gao.gov/products/GAO-02-92]
(Washington, D.C.: Jan. 15, 2002).
[14] U.S. General Accounting Office, Managing for Results: Challenges
Agencies Face in Producing Credible Performance Information,
[hyperlink, http://www.gao.gov/products/GAO/GGD-00-52] (Washington,
D.C.: Feb. 4, 2000).
[15] U.S. General Accounting Office, Internal Revenue Service:
Assessment of Budget Request for Fiscal Year 2003 and Interim Results
of 2002 Tax Filing Season, [hyperlink,
http://www.gao.gov/products/GAO-02-580T] (Washington, D.C.: Apr. 9,
2002).
[16] U.S. General Accounting Office, Financial Audit: IRS's Fiscal
Years 2001 and 2000 Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO-02-414] (Washington, D.C.: Feb. 27,
2002).
[End of testimony]